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Compound interest is often called the "eighth wonder of the world" because it's the most powerful force in investing. Unlike simple interest, compound interest earns returns on your initial investment AND on the interest you've already earned.

The Compound Interest Formula

The mathematical formula for compound interest is:

Where:

• A = Final amount
• P = Principal (initial investment)
• r = Annual interest rate (as decimal)
• n = Number of times interest compounds per year
• t = Number of years

Why Compound Interest Matters for Investors

The key to building wealth is starting early and staying consistent. Here's why:

• Time is your greatest asset: The longer your money compounds, the more dramatically it grows
• Regular contributions accelerate growth: Monthly deposits compound on themselves
• Patience pays off: Most wealth is built in the final years of compound growth

Real-World Example

Let's say you invest £10,000 initially and add £500 per month for 20 years at 7% annual returns:

Notice how the interest (£170,851) is actually more than your contributions (£130,000)! That's the power of compound interest over time.

Tips for Maximizing Compound Interest

1. 1. Start as early as possible: Even small amounts compound significantly over decades
2. 2. Be consistent with contributions: Regular monthly investments add up
3. 3. Reinvest dividends: Use dividends to buy more shares
4. 4. Minimize fees: Lower fees mean more of your money compounds
5. 5. Stay invested during downturns: Time in the market beats timing the market

What Returns Can You Expect?

Historical returns vary by asset class:

• S&P 500 stocks: ~10% average annual return (historical)
• UK FTSE 100: ~7-8% average annual return
• Bonds: ~4-6% average annual return
• Cash savings: ~1-3% (often below inflation)

Past performance doesn't guarantee future results. Always diversify and understand your risk tolerance.